Common Tragedies

Thoughts on Environmental Economics

Gas prices vs. wealth

Posted by Evan Herrnstadt on December 10, 2007

Mark Perry argues that the economy can absorb current gas prices. Even though America has experienced increasing gas prices, the price of gas as a share of per-capita net worth is still lower than it was at any point except the early 1980’s and late 1990’s:

gas prices share of income

This an interesting way to think about the persistence of relatively inelastic demand, even as real oil prices near historic highs. However, Perry fails to consider that the average American lifestyle has changed considerably. According to the Nationwide Personal Transportation Study (as cited by Gordon, et al) , from 1985-2001 the average American’s commute increased from 8.5 to 12.1 miles, a 42 percent increase. Thinking about trends in land use over the past six decades, I would guess that these changes can be extrapolated to some extent through the time series shown in Perry’s graph, although I don’t have hard data that backs this claim. On the other hand, vehicles have also become considerably more fuel efficient since the 1950’s.

Although it does seem that the American economy is doing okay with higher gas prices, we clearly do not live in the 1950’s. Perry’s brief analysis proposes a way of scaling gas prices independent of consumption patterns, but we should be careful comparing the place of gasoline in today’s economy to its role in the immediate postwar era.

H/T: Mankiw.

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